Everything you need to know about refinancing
For some of us, managing our own finances is a breeze, but for others, it’s all too easy to fall into credit card traps with high interest rates and what seems like inescapable debt.
What is refinancing?
Those of us who have ever bought a car with a car loan most likely would have, out of convenience, chosen to finance it with the dealership’s preferred lender. The dealership usually explains that it’s easy to pay off these instalments every month but, if you’re like most of us out there, you’re usually too dazzled by that new car feeling to take notice of the finer details.
Refinancing is the process of switching lenders, usually to one with better rates, in order to decrease your loan term, interest rates or repayments. Sounds great, right? But there’s a lot more to refinancing than what’s on the surface and it’s important that before you choose to consider this option, you understand the basics.
Why might you want to consider refinancing?
There are many reasons why you may want to consider refinancing. Many don’t realise that this option is available and more often than not, they are left with an expensive, long-term loan that never seems to go away. If you have seen a better financing offer or simply want to switch to a company who may have lower interest rates or other benefits, then refinancing may be for you.
Am I eligible for refinance?
How do you know if you are eligible for refinancing your loan? Equity is something most lenders take into account when determining your individual risk. It’s important to remember that borrowing money is a business and that lenders must assess your risk and decide whether they will or will not grant you a loan. Equity is a common term that indicates whether you are of a higher or lower risk to the lender.
The equity equation:
Equity = loan item value* – outstanding loan amount**
*Loan item value: the value of your car or home.
**Outstanding loan value: the amount left to pay off your loan.
In short, equity is the difference between your amount owed to the financier and the net worth of your loan item. In other terms, it’s the profit you would make if you sold that item and paid off the loan. The higher your equity, the lower the risk and the more likely you are to apply for refinancing.
For example, if David’s car is worth $35,000 and he has $15,000 left to pay off that loan, he would be left with $20,000 in equity (or profit if he sold it). This amount ($20,000) is David’s equity, so if he for whatever reason cannot pay off his loan, the lender will take his car, sell it and receive $20,000 to replace his loan (with the lender making a $5,000 profit).
Advantages of refinancing
✔ Gain a better interest rate: for car owners, refinancing can lead to securing a lower interest rate, meaning you can save more money and focus on repaying your debt in a shorter time frame.
✔ Consolidate other debts into one loan repayment: imagine you have a car loan and a home loan. By refinancing, you can merge these two high-interest loans into one through debt consolidation. In this way, you can secure a lower interest rate for both items, repay one fee and ultimately save money in the long run. Please be wary, this method has its risks as it can turn short-term loans into long-term. We recommend talking to your finance professional about considering this option. You can call The Loan Panel on 1300 22 13 12.
✔ Reduce monthly repayment amounts: a lower comparable interest rate generally means lower repayments.
✔ Reduce your own risk and threat of accruing a bad credit score: by saving time and money with refinancing, you can reduce your own risk of not being able to repay instalments.
✔ To free up cash: free up cash for other important investments, whether it be a new property, car or you simply want some extra cash.
Risks of refinancing:
✖ Paying more interest over a long period of time: if you have chosen an ill-suited finance company, the interest rates may seem lower but an extended loan period could mean that you actually end up paying more than your previous lender. We recommend that you always check with your financier before choosing to switch.
✖ Exit and set-up costs: some lenders have exit costs and set-up costs to prevent situations like refinancing. Consider these costs and determine whether they lie within the amount you will be saving with your new loan. If the benefit outweighs the costs, then we recommend that you strongly consider your options with refinancing.
The Loan Panel solution for refinance
Take a look at some of our refinance cases below. In a few easy steps, The Loan Panel can help you reduce the term of your loan, reduce your number of repayments and even lower the amount payable.
David reduced the term of his loan:
David financed his car with his bank who he had used for the past 15 years. After reviewing David’s situation we were able to secure a lower rate which reduced the term of the loan without his fortnightly instalment increasing. Refinancing reduced David’s current loan by 5 months, saving him $4,649 in interest and allowing him to own his car outright sooner.
|Bank Loan||Loan Panel Refinance|
|Payout with Bank||$35,356||$35,356|
|Term Remaining||48 Months||43 Months|
Alex decreased his amount payable each month
The car dealership helped Alex drive away in his new car the same day by arranging his finance. The temptation was too much at the time, however, following a quick discussion with The Loan Panel, Alex was able to save $7,585.50 over the remaining term of his loan.
|Dealer Loan||Loan Panel Refinance|
|Payout with Financier||$58,937.07||$58,937.07|
|Term Remaining||60 Months||60 Months|
❑ How much equity is required for refinancing with the new lender?
❑ Is the interest rate with a new lender lower than my current rate?
❑ What fees are there for exiting my current lender?
❑ What fees are there for applying for refinance?
❑ Flexibility of new lender – will you have the ability to make withdraws or free up cash?
❑ Loan term – is it a long-term or short-term loan?
❑ Security of my current and new loan – secured versus unsecured loans (secured loans generally have lower interest rates but require an asset as protection in case of default). Learn more about interest and secured versus unsecured car loans here.
Think refinancing may be for you?
If you think that refinancing may be right for you, then make sure you contact the team at The Loan Panel today. We can answer all your questions regarding your current financial situation, help you out with your car loan and get you on your way to paying off your loan!